Prolonged-war scenario seen cutting PHL growth to 3.79%

PHILIPPINE growth could slow to 3.79% in 2026 if the war in the Middle East is prolonged and becomes a routine feature of the economy, De La Salle University (DLSU) said in a report.

In their Report of the Philippine Economy for April, DLSU economists said their prolonged-war growth scenario represents a downgrade from a 4.19% estimate in March.

“If it materializes, it would represent a significant deceleration with respect to the already low growth rate of 2025 (4.4%),” the report said.

“We insist that if the war continues, the Philippine economy (already beset by corruption induced pessimism and weak capital formation) will remain sluggish— even with Iran guaranteeing safe passage for Philippine vessels along the Strait of Hormuz,” it added.

If the forecast is realized, growth will fall below the government’s 5-6% gross domestic product growth target for 2026.

“Medium-term growth is predicted to improve slightly. We forecast growth to hit 4.23% in 2027 and 4.17% in 2028. Both figures remain substantially below the government’s growth targets of 5.5-6.5%,” the report said.

“This estimate seems to point to a prolonged period of subdued capital formation that constrains potential growth well beyond the immediate crisis,” it added.

The government declared a one-year national energy emergency last month in response to the war that broke out in the Middle East.

Meanwhile, the economists said inflation is expected to hover near or above the upper bound of the 2-4% target band through the end of the year, citing “a set of risks unlikely to disappear any time soon.”

“Any further disruptions to the supply of oil would push global energy prices higher and domestic prices would likely follow suit,” it said.

“In other words, even if global conditions calm down, inflation could remain elevated well into the second half of the year. The Philippine economy may start showing symptoms of stagflation,” it added.

Philippine inflation accelerated to a nearly two‑year high of 4.1% in March, breaching the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target.

The report said fiscal and monetary authorities face a set of critical decisions as the crisis unfolds.

“Repeated supply shocks are complicating interest rate decisions, while elevated financial vulnerabilities are making policy transmission less predictable,” it said.

“Clear communication, effective macro-prudential measures, and stronger coordination with fiscal policy are essential to anchor expectations and safeguard growth and stability,” it added.

The BSP kept its policy rate unchanged at 4.25% during a surprise off-cycle meeting last month, ahead of the Monetary Board’s regular policy meeting on April 23.

“Fiscal policy must balance targeted protection with macroeconomic stability,” the report said.

“Consistent with the principles of sound finance, the government’s initial response reflects two main objectives: providing targeted relief to economically vulnerable groups and maintaining fiscal discipline to safeguard the state’s financial position,” it added.

It said that “well-designed, temporary, and targeted measures can shield vulnerable groups and sustain social cohesion, while credible fiscal trajectories and coherent coordination with monetary policy are essential to contain inflationary risks.”

It added that the government should address structural bottlenecks in food, energy, transport, and logistics.

“This will require adopting a more structural perspective — one that allows for a substantial reorientation of fiscal policy,” it said.

“Such an approach would move beyond selective relief and fiscal preservation toward actively supporting the productive sectors of the economy, sustaining employment, and building the material capacity needed for a more effective collective response to future crises,” it added. — Justine Irish D. Tabile